A fraud scandal in the USA sheds light on the problems of this form of insurance, which is described by science and insurance practice as a solution to many problems.
So-called parametric insurance receives a lot of attention in the scientific literature. What is special about it is that it pays out automatically when a certain, scientifically determinable index value is reached.
This is particularly convincing for weather-related insurance. Certain amounts of rain or hail or other measurable weather events can be set as triggers to trigger an insurance payment. This is interesting for agricultural insurance, where an individually triggered claim would not always be easy to determine. But homeowners can also be protected against weather risks in this way.
Old idea, modern technology
The idea of parametric insurance goes back well over 100 years, write the US authors Xiao Lin and W. Jean Kwon in a 2020 article in the scientific journal Risk Management and Insurance Review. In 1949, a scientific concept for such insurance was published in the USA that could help farmers if the amount of rainfall fell below a certain level and crop failure was threatened. However, such insurance has only been used in practice since the 1990s, after measurement techniques were improved. Blockchain-based parametric insurance has also been discussed and developed recently.
The main advantages are the flexibility and simplicity of the application. In the event of a claim, there is no need for a complex investigation and assessment of whether and to what extent an insured event has occurred. Rather, if a certain index value is exceeded or not met, the insurance benefit is due without any further proof being required. This means that the costs of settling claims are particularly low. The moral hazard, i.e. a change in behavior towards riskier behavior after taking out the insurance, is lower than in traditional insurance.
Should primarily serve to support poor farmers
Parametric insurance has been proposed and used in many developing countries, particularly to help poor farmers. So-called microinsurance with very small premiums and benefits is only economically viable due to the low operating and regulatory costs of parametric insurance. But such coverage also plays an important role in the USA, in conjunction with government aid to support agriculture.
Private insurance against drought, for example, is subsidized by the state. This amounted to a total of 19 billion US dollars in 2022 alone, according to The Colorado Sun newspaper. Crop insurance is sold by local insurance agents. It pays out automatically if less than 80 percent of the long-term average rainfall falls in a certain area and at a certain time.
Manipulated rain gauges
However, a fraud scandal in the US states of Kansas and Colorado, reported on by the Colorado Sun, shows that the moral hazard is by no means as low as claimed in theoretical treatises.
In 2016/2017, it was noticed that the weather stations spread across the country reported unusually little rain, even though the weather conditions were such that corresponding rainfall was expected. The weather stations have heated tipping cups that fill with rain or snow and tip over when they reach a certain amount, generating electrical impulses and sending messages to the National Weather Service. In addition, field technicians from the weather authorities found that manipulations had been carried out on a large scale, such as signal wires being cut. Other methods such as holes in the measuring cups, silicone fillings or covers were also noticed.
Damage worth millions
The investigations only really got rolling when insurance detectives contacted the US Department of Agriculture. The investigations revealed a large loss of millions in payments made by parametric insurance companies for alleged droughts, which was due to criminal manipulation of the relevant weather stations.
Two farmers eventually agreed with the authorities to pay $6.6 million in fines for insurance fraud and spent six months in federal prison.
The key witness for the insurance fraud was a farm worker who had carried out the manipulations. He had repeatedly had trouble with the law enforcement authorities because of various other crimes and demanded hush money payments from his clients in order to be able to pay bail. Some of the hush money was also apparently paid via two of the farm worker's girlfriends. But then he changed sides and gave the investigating authorities details that the fraud could have gone back to at least 2010, perhaps even to 2001.
However, things did not end well for the key witness. He escaped from prison and was found dead in an empty farmhouse in August 2023 after a weeks-long search. Only his estate was increased by 500,000 US dollars because whistleblowers in the USA can participate in tax refunds that the state can realize through the whistleblower.
Doubts about the reliability of climate change-related data
But the fraud case has another significance: It casts a bad light on the reliability of weather data, which is used, among other things, to monitor climate change.
Jennifer Stark, the regional director of the National Weather Service, was equally shocked: "We pride ourselves on providing objective, quality-controlled precipitation data to the public, researchers and climatologists. Personally, I never thought anyone would try to corrupt these records or compromise their quality. That's pretty much the core of the National Weather Service: providing high-quality data."
Source - www.versicherungsmagazin.de
